The huge US government budget surplus - which one year ago was estimated at $5.6 trillion over 10 years - is set to disappear as the effects of the economic slowdown and the Bush administration tax cuts take effect.

The president told us and told the American people that we could have it all. He was wrong by a country mile

Senator Kent Conrad (Democrat)

New estimates by the Congressional Budget Office (CBO) show that most of the projected surplus will not now materialise.

The new estimate suggests that the total surplus will only be $1.6 trillion - and nearly all of that will be a surplus that the social security trust funds are obliged to build up to meet future obligations.

Missing $4 trillion

The CBO says that slower growth will shave $1 trillion off its estimates of a budget surplus in the next decade, while increased spending commitments will add more than $500bn.

Managing the US economy just got harder

And debt interest payments are forecast to increase by $500bn.
But the biggest contribution to the declining surplus are the tax cuts, which amount to $1.3 trillion.

In all, the CBO says that Congressional actions have made up 60% ($2.6 trillion) of the revisions.

And it points out that in the next two years, the overall Federal budget is now expected to go into deficit for the first time in four years - a dramatic turnaround from projected surpluses of more than $300bn made earlier in the year.

As budget hearings opened, Democrats attacked the Bush administration's handling of the economy.

"The president told us and told the American people that we could have it all," said the budget panel chairman, Senator Kent
Conrad. "He was wrong by a country mile."

Democrats like Edward Kennedy are arguing for... more public spending [saying] it is unfair that most of the tax cuts go to the rich

Meanwhile, the Bush administration is expected to propose next month a Federal budget that runs an even bigger deficit of nearly $100bn to cover the costs of the war against terrorism.

"The president has repeatedly said that in a time of war, recession and a national emergency, that we need to focus on those
priorities," White House spokesman Scott McClellan said.

Fierce debate

The vanishing surplus is fuelling a fierce political debate about what should be done about the US economic slowdown.

The Bush administration, which pushed through the $1.3 trillion package of tax cuts in the spring, insists that it is still vital for economic recovery.

But their attempt to pass legislation mandating further tax cuts in December - to deal with the economic effects of the terrorist attacks - have stalled in the Congress amid partisan wrangling.

Democrats like Edward Kennedy, the senior Senator for Massachusetts, are arguing for a pause in future tax cuts, and more public spending.

They argue that it is unfair that most of the tax cuts go to the rich who earn more than $100,000 a year.

Social security surplus

The Bush administration wants to increase spending on home security and the military, while freezing spending in most other areas.

And in an election year, there will be a fierce fight with Congress in agreeing the budget.

But looming over the debate is the bigger problem of the future of the US state pension system, social security.

It now appears that the government will be dipping into the surpluses to fund its current operations, just as it did in the 1980s and 1990s

Much of the projected budget surpluses were actually "off-budget" - they are the accumulated surpluses being built up by the social security system against the claims of the "baby boomers" who will be retiring after 2010.

It is widely believed that the system needs this surplus - and more - in order to meet the claims of this large generation of retirees.

Indeed, previously both parties had agreed to a "social security lock box" to leave this surplus untouched.

Non-starter

But now it appears that the government will be dipping into these surpluses to fund its current operations, just as it did in the 1980s and 1990s before the budget crisis was resolved.

The Bush administration plan to convert some of the social security surplus into individual stock accounts for retirees now looks like a non-starter.

The declining surplus will increase the political temperature in Washington, erasing the consensus built up in the years of budget surplus and - perhaps - leading to a return to the partisanship of the early Clinton years.

It appears that the economic front of the war against terrorism may prove much harder to fight than the military front.